This article is a continuation of Should I Get a Credit Card Part 1: The Advantages.
Credit cards have become a convenience, especially to those with relatively stable income sources. These pieces of plastic as mentioned in the previous article offers several advantages that would make the owner financially efficient compared to conservative cash payers. However, these things do not just offer good things as it also provides several problems which you as the holder should be aware of.
There are a lot of points to consider in having a credit card that you can only find in the boring terms and conditions that we more often forget to read or take for granted. Applying for a credit card also ends up in allowing banks to access all of your financial information and you become profiled in terms of your credit standing. There are also things that are too good to be true and we simply fall for them without actually realizing we are losing more than what we thought we are getting. These include the annual fees and reward programs. At the same time, credit card customer service are often not as helpful as you expect.
“Free” Annual Fees
You should never think that everything is for free. Or probably, you haven’t heard of the saying that goes, “There is no such thing as a free lunch.” This is exactly what credit cards are. Upon application, everything will be seemingly too good to be true. Banks would tell you several things like “free annual fee for life” or “first year of annual fee on us”. First, let us define what annual fees are. These are regularly billed fees every year as payment for the credit service that your bank provides.
These “free” offers usually tend to attract new cardholders or new entrants in that particular bank. But these same free offerings come with a finer print that we sometimes fail to read. Statements like “free annual fee” are on bigger font sizes followed by an asterisk (*) which details the condition far below the advertisement with a smaller font size saying, for example, “with a minimum of PHP20,000 spend within the first 60 days of card approval”. At this rate, you will be pressured to spend that much even if you don’t need to.
Now, some banks also offer free annual fees for their entry-level, non-premium credit cards. These usually do not have any rewards program and would plainly just be advantageous for transactors (those who always zero-out or pay off all of their monthly bills). The trick here for banks to earn a profit are for those who actually could not pay their monthly bills in full but would have the capacity to pay at least the minimum monthly dues. With that being mentioned, interest comes in as the primary source of income for banks with this card offering.
Rewards Programs (or really?)
Another way that people get attracted to credit cards are rewards. As mentioned in the previous articles, the rewards program often provide credits for loyalty programs such as the SMAC or the GoRewards, miles in airlines, and other similar schemes. If we bundle it with the previously mentioned annual fees, you will definitely get my point – those rewards aren’t truly free and you pay for those.
The rewards programs would usually give you cashback or rewards points for every specific spend, say 1 point or PHP1.00 for every PHP200 spend. If you do the math, let’s say you pay PHP3,000 for the annual fee of a credit card with a lifestyle rewards program. For you to actually breakeven with the rewards you are getting (at PHP1.00 for every PHP200 spend), you will need to spend at least PHP600,000. If you do not spend that much, you are not on the winning side of the rewards program. Unless you are rich enough to spend more than that, you are just being tricked into using credit cards and even paying off all of your monthly dues did not save you money in the sense.
However, this is just the tip of the iceberg of the rewards program scheme. We also fail to consider that merchants or simply, the stores we visit that accept credit cards usually pay banks administrative and processing fees for your payment. In effect, products tend to be costlier. Ever wonder why some stores offer discounts when you pay in cash or charge your credit card the full amount without installments? It is because they would no longer or at least pay less of those fees that banks charge.
Some stores arbitrarily offset these bank charges to all customers paying in cash or credit cards – just one price for all to avoid any complications. Thus, you can fairly say that when you pay in cash, you actually lose more money than with a credit card, especially if your card has a rewards program. Nonetheless, remember that rewards programs only favor big time spenders.
Let us be honest, a credit card is a business model. At the end of the day, banks would offer you all good things, to good to be true, at a hidden price. Otherwise, what good would they get from offering credit cards in the first place?
Customer service is a bit tricky with banks for credit cards. We get charged here and there. We get all the problems with the bank’s lack of diligence in securing our private data despite all of the assurance they provide in the fine print. Scams are rampant and we often carry the burden of the risks that banks do not necessarily assume. Although it is not my personal experience, I have heard stories of terrible customer service putting the banks into the advantage and crippling less financially literate credit cardholders. Simply put, that if you do not know your rights or read the fine print of a card’s terms and conditions, that is on you.
On a personal experience, I have been a victim of some unresolved technical glitches of the Cebu Pacific credit card offered by the Union Bank of the Philippines. It took over a year to get my rewards points credited to my account although in the fine print it mentioned that it will be automatically credited. I contacted the customer support of Union Bank which was not very helpful and did not yield results. Fed up with their unfulfilled promises, I resorted to filing a complaint with the Bangko Sentral ng Pilipinas. I was glad it was sorted out in a week. However, as I observed, the new rewards points I have been earning for several months are again not credited. So, yes, Union Bank is definitely off my list for good credit cards.
So I definitely guarantee that credit cards are only good while they keep their promises. When things go badly, their customer service representatives are programmed or oriented to always put the bank’s interests first before yours, especially if you are not a high tier cardholder. In addition, high tier cardholders are considered low risk for disputes considering that they would rarely mind the perks they earn, a complimentary access to an airport lounge is more than enough for them.
You may wonder how banks would set your credit limit. It can be based on your credit score. The credit score is a measure of your capacity to be able to pay for the money you owe. A lot of sources say that it can be based on the number of bank accounts you have, the flow of money that goes in and out, repayment history, and many more.
Thus, you are being profiled on your financial capacity. It is part of the credit card application process and you can simply not do away with this.
Another risk you can expect is that when you decide to close a credit card account, it will negatively impact your credit score and end up earning lower credit limits in your new applications, or worse, not qualifying at all. Thus, you have to be mindful when you apply for a credit card. One tip is to also ensure that you settled any debt before closing your credit card account i.e. paying your debt off and have a zero balance before notifying your bank that you wish to close the credit account.
So credit cards offer a handful of advantages and disadvantages. It lies to your judgment whether or not these are helpful. As society is leading towards digital transformation and banks get more creative in getting new credit card customers, financial literacy and inclusivity should be at the center of its success.
Financially, credit cards offer unprecedented efficiency in transactions versus what cash traditionally offered. It also offers banks a very lucrative business model to keep it afloat. After all, banks earn mostly from our debt. However, financial institution regulators should ensure these are not profiteered to fully realize a financially enabled, literate, and inclusive world.